What is an S Corporation—Key Steps to Launch Your S Corp!
Starting a business in the United States comes with many choices. One of the most popular structures for small and medium-sized businesses is the S Corporation (also called an S Corp). But what exactly is an S Corporation, and how do you set one up?
This guide will walk you through the meaning of an S Corporation, why entrepreneurs choose it, and the step-by-step process to launch one. Whether you’re a new business owner or looking to change your current structure, this breakdown will give you clarity and confidence.
Table of Contents: —
What is an S Corporation?
An S Corporation is a type of business entity recognized under the U.S. tax code. It isn’t a separate type of corporation under state law. Instead, it’s a tax status you elect with the IRS after forming either a C Corporation or a Limited Liability Company (LLC).
The “S” in S Corporation stands for Subchapter S of the Internal Revenue Code. Businesses that qualify for this status can avoid the double taxation that traditional C Corporations face. Instead of the corporation paying income taxes on its profits and then shareholders paying taxes again on dividends, an S Corp allows profits (and some losses) to pass through directly to shareholders, who report them on their personal tax returns.
Benefits of an S Corporation: —
Before diving into the steps of forming one, let’s look at why many U.S. businesses choose the S Corp structure.
- Tax Savings: The biggest advantage is avoiding double taxation. Profits go directly to the shareholders and are only taxed once on their personal income tax returns.
- Pass-Through Losses: If your business experiences losses, shareholders can use them to offset other income on their personal tax returns (within IRS rules).
- Self-Employment Tax Advantage: Unlike LLC owners, S Corp shareholders who work for the company can take part of their income as distributions instead of wages. Wages are subject to payroll taxes, but distributions generally are not. This can reduce overall tax liability.
- Credibility: Forming an S Corp can make your business look more established to banks, investors, and potential clients.
- Limited Liability Protection: Like other corporate structures, S Corps protect personal assets. Shareholders’ personal property (such as homes or cars) is usually safe from business debts and lawsuits.
Requirements for S Corporation Status: —
Not every business qualifies as an S Corporation. The IRS sets specific eligibility rules:
- Must be a domestic corporation (formed in the U.S.).
- Can have only one class of stock.
- Can have no more than 100 shareholders.
- Shareholders must be U.S. citizens or residents (no foreign shareholders).
- Shareholders must be individuals, certain trusts, or estates (not partnerships or other corporations).
Recent update: In the past year, the rules have been slightly expanded. Certain retirement accounts (like IRAs) and some trusts may now hold S Corp stock, and in some cases, employees can be treated as one “shareholder” when counting the 100-shareholder limit. These changes give S Corps a bit more flexibility than before.
Key Steps to Launch Your S Corporation: —
Now, let’s walk through the practical steps to form and maintain an S Corporation in the U.S.
Step 1: Choose Your Business Name:
Your business name must be unique and follow state naming rules. Most states require including words like “Corporation,” “Incorporated,” or abbreviations such as “Inc.”
Tip: Check availability with your state’s Secretary of State office before filing.
Step 2: Register Your Business as a Corporation or LLC:
Since an S Corp is a tax election, you must first form a legal entity:
- File Articles of Incorporation if you’re forming a corporation, or
- File Articles of Organization if you’re forming an LLC.
This is done at the state level and usually requires a filing fee.
Step 3: Obtain an Employer Identification Number (EIN):
An EIN (also called a Federal Tax ID Number) is issued by the IRS and is required for tax filings, hiring employees, and opening a business bank account. You can apply online directly with the IRS for free.
Step 4: File Form 2553 with the IRS:
To elect S Corporation status, file Form 2553, Election by a Small Business Corporation.
Important deadlines:
- You must file within 2 months and 15 days of the start of the tax year when you want S Corp status to take effect.
- If you miss the deadline, the IRS may grant late relief in certain cases.
Step 5: Set Up Corporate Bylaws and Hold Initial Meetings:
Even small businesses should create corporate bylaws—internal rules that outline how the business will operate. This includes:
- Decision-making processes
- Shareholder voting rights
- Meeting schedules
You’ll also need to hold an initial board of directors meeting to officially adopt the bylaws and issue stock.
Step 6: Open a Business Bank Account:
Keeping business and personal finances separate is crucial. Open a dedicated business bank account under your corporation’s name and EIN.
Step 7: Stay Compliant with State and Federal Rules:
S Corps must follow ongoing requirements such as:
- Filing annual reports with the state.
- Paying state fees or franchise taxes (varies by state).
- Holding regular shareholder and director meetings.
- Keeping accurate meeting minutes and records.
Important update: In 2024, many small corporations—including S Corps—were required to file Beneficial Ownership Information (BOI) reports under the Corporate Transparency Act. In early 2025, that requirement was rolled back for most domestic businesses. However, because this rule is still evolving, it’s important to stay alert for changes that could reintroduce reporting obligations.
Common Mistakes to Avoid: —
Even though forming an S Corporation is straightforward, many business owners make mistakes. Here are some to watch out for:
- Missing the filing deadline for Form 2553.
- Mixing personal and business finances, which could lead to losing liability protection.
- Paying unreasonably low salaries to shareholder-employees. The IRS requires you to pay yourself a “reasonable salary” before taking distributions. In fact, IRS audits have increased in recent years, and rising payroll tax thresholds (like the Social Security wage base) mean this issue is under more scrutiny than ever.
- Not keeping proper records, which can create legal and tax problems.
Is an S Corporation Right for You?
Choosing an S Corporation depends on your business goals, financial situation, and future growth plans. It’s often a good fit for:
- Small to medium-sized businesses with stable profits.
- Business owners who want to save on self-employment taxes.
- Companies that don’t plan to go public or take on many investors.
However, if you expect rapid growth, foreign investors, or multiple stock classes, a C Corporation may be better.
Final Thoughts: —
An S Corporation can be a powerful way for U.S. entrepreneurs to run their businesses while enjoying tax benefits and liability protection. By following the right steps—choosing your business structure, filing the correct forms, and maintaining compliance—you can launch your S Corp with confidence.
One more piece of good news: the Qualified Business Income (QBI) deduction, which lets many S Corp owners deduct up to 20% of qualified income, has recently been made permanent. This offers long-term stability for planning and tax savings.
As with any legal or tax-related decision, it’s wise to consult a qualified attorney or accountant to ensure you’re making the best choice for your unique situation.
👉 If you’re ready to apply for S Corp status, eCheckplan can guide you through every step and make the process simple.
